section 1 – introduction to economics · web viewib economics revision semester 1 pa per 1 e...

Section 1 – Introduction to Economics

Section 2

Commerce

Year 12 IB Economics

Revision

Semester 1

PAPER 1

Extended Response

2

ContentsNovember 2013 subject reports3On Evaluation7Assessment Criteria10Section 1 – Microeconomics12Section 1.1 – Markets12Section 1.2 – Elasticities13Section 1.3 – Government Intervention14Section 1.4 – Market Failure15Section 1.5 – Theory of the Firm15Section 1 – Microeconomics – Marking Schema18Section 1.1 – Markets18Section 1.2 – Elasticities27Section 1.3 – Government Intervention31Section 1.4 – Market Failure34Section 1.5 – Theory of the Firm42Section 2 – Macroeconomics57Section 2.1 The Level of Overall Economic Activity57Section 2.2 – Aggregate Demand and Aggregate Supply58Section 2.3 – Macroeconomic Objectives60Section 2.4 to 2.6 – Demand and Supply Side Policies62Section 2 – Macroeconomics – Marking Schema64Section 2.1 – The Level of Overall Economic Activity64Section 2.2 – Aggregate Demand and Aggregate Supply66Section 2.3 – Macro Economic Goals76Section 2.4 to 2.6 – Demand and Supply Side Policies89

November 2013 subject reports

ECONOMICS

Overall grade boundaries

Higher Level

Grade:

1

2

3

4

5

6

7

Mark range:

Standard Level

0 - 12

13 - 24

25 - 40

41 - 53

54 - 65

66 - 78

79 - 100

Grade:

1

2

3

4

5

6

7

Mark range:

0 - 12

13 - 25

26 - 38

39 - 51

52 - 64

65 - 77

78 - 100

Higher and standard level internal assessment

Component grade boundaries

Grade:

1

2

3

4

5

6

7

Mark range:

0 - 6

7 - 12

13 - 20

21 - 26

27 - 31

32 - 37

38 – 45

Higher level paper one

Component grade boundaries

Grade:

1

2

3

4

5

6

7

Mark range:

0 - 5

6 - 10

11 - 19

20 - 26

27 - 31

32 - 37

38 – 45

General comments

A large majority of the centres that provided feedback expressed satisfaction with the paper. The standard of scripts was consistent with those of the May session. With regard to the questions, 1 and 4 were the more popular. There were relatively fewer responses to question

2. Question 3 was also less popular.

What was quite noticeable amongst the scripts was the fact that there was no obviously poorly done question. There was a full range of responses in terms of quality to each of the questions.

The areas of the programme and examination which appeared difficult for the candidates

A significant minority of candidates were unable to accurately identify the leakages and injections associated with the circular flow. The concept of sustainability seems to be poorly understood by some candidates. Some candidates appear to run out of time, so time management might be a consideration for exam preparation. Some candidates confuse the labels on their diagrams between macroeconomic and microeconomic themes. Typically, drawing what looks like a microeconomic supply and demand diagram and then describing it in macroeconomic terms.

The areas of the programme and examination in which candidates appeared well prepared

Candidates showed a good knowledge of indirect taxes and maximum price and the vast majority could accurately display them in diagrams. Candidates also seemed comfortable with policies to correct inflation. There was also a good understanding of national income statistics on display.

The strengths and weaknesses of the candidates in the treatment of individual questions

Section A - microeconomics

Queston 1

(a) This was the singularly most popular question. The quality of responses was generally very high. The question is quite straightforward and candidates were able to access what the question was getting at with few problems. Diagrams were usually effectively employed, suitably labelled and accompanied by appropriate explanation. Good candidates were able to develop various impacts on consumers and producers including on levels of consumer and producer surplus.

(b) In part (b) they did tend, as expected, to refer to the content and the diagram in part (a).

However, they often repeated information already given; they also tended to use maximum prices as one of the policy options, which was fine but few went beyond what they had already said in part (a). Examples were thin on the ground and this is something that needs to be stressed. The utilization of examples is indicated for both level three and level four of the level descriptors. Candidates usually considered subsidies and government welfare policies with good candidates able to provide real life examples, which were considered in a meaningful way.

Question 2

(a) This question was unpopular but those who did do it were very well prepared. There were many very good responses. Part (a) is a straightforward question and candidates had few problems identifying reasons why governments impose indirect taxes, such as to influence consumption and correct for negative externalities in consumption and production.

(b) Sustainability appears to be a concept that deters many candidates. Many are unsure as to what it actually is and attempted to respond without offering a meaningful definition on which they might base the answer.

However, it is well represented in the syllabus and if centres are overlooking this area they should reconsider. Good candidates began with a definition of sustainability and proceeded to consider possible government responses to threats to sustainability such as carbon taxes and cap and trade schemes. Some candidates were able to provide very well thought through arguments supported by real life examples.

Section B - macroeconomics

Question 3

(a) Candidates usually opted for a diagram to present the circular flow model for this question. A surprising numbers of responses could not clearly identify the relevant leakages and injections accurately. The question was trying to establish whether candidates could relate the relative magnitude of leakages and injections to changes in the level of economic activity. Many candidates were able to obtain high marks here.

(b) Part (b) was very straightforward and respondents were usually able to produce a good answer to this. Responses tended to take a critical line and it is perhaps worth noting that evaluation needs to have an element of balance. Some candidates produced answers that did not sufficiently respond to the precise demands of the question. They tended to

discuss the merits of national income statistics in general without establishing links to the

“standard of living over time” as specified by the question.

Question 4

(a) Candidates experienced few problems with this question. Most chose to begin by explaining in general terms how the CPI index is assembled. They were usually able to identify the relevant drawbacks relating to the use of a CPI index such as the differences that might exist in consumption patterns between different income levels.

(b) This was a very straightforward question for most candidates and they tended to approach the question with the use of demand side and supply side policies. It was usual to see candidates distinguish between types of inflation. Some good candidates referred to specific governments and policies that they had enacted. A number of candidates provided diagrams that they labelled as microeconomic diagrams but then proceeded with the macroeconomic explanation appropriate to the question.

Recommendationsandguidancefortheteachingoffuture candidates

Emphasize the use of examples. One possibility to support the use of examples is to get candidates to keep a diary of economic events throughout their course. This will provide them with examples that they can utilize in the examination. It may also assist them in the search for suitable articles for their internal assessment.

Use diagrams carefully. Candidates should use appropriate labels with regard to macroeconomic and microeconomic scenarios.

Candidates need to be made aware that they need to cover the whole syllabus. The way the assessment is structured makes it hazardous to omit any particular area. It was evident from some scripts that some candidates had engaged in selective revision.

Stress to candidates the need for careful time management between the two sections of the paper. Candidates should have practice with regard to time management under examination conditions.

Candidates should pay attention to the clarity of their handwriting. As the digital age progresses there are an increasing number of scripts that are very difficult to read. Scripts that are hard to read are obviously difficult to assess.

On Evaluation

J.Blink, Vienna, April 2004

What does evaluation mean?

Two dictionary definitions of evaluate are as follows:

v: to examine and judge carefully; appraise

v : place a value on; judge the worth of something

Evaluation asks for different views to be clearly outlined and then weighed against each other in economic terms. Evidence in favour of different arguments/standpoints should be given and discussed. A conclusion must be included which is clearly based on evidence brought up in the discussion. For example, ‘Evaluate the success of planned economies in solving the basic economic problem’. (A basic ingredient in the answer would of course be to contrast the planned system with the market system and then conclude with an overall judgement about the success of planned economies).

How can I accomplish evaluation?

It is not quite enough to simply finish a sentence that begins, “On the other hand . . .” but it is a good start.

· Prioritise the arguments

“The most important argument against protectionism in international trade is that it represents a global misallocation of resources.” or “The least effective argument for protectionism in international trade, in terms of economic reasoning, is that the industry is a strategic industry.”

· Long run vs. short run

“In the short run, abnormal profits can be earned. However, in the long run this is not possible.” or “In the short run, it may be possible to justify the infant industry argument. However, the danger is that in the long run, the industry will remain inefficient.”

· Consider the issue from the points of view of different stakeholders.

What is a stakeholder? One dictionary definition is as follows: a person or group that has an investment, share, or interest in something.

In terms of economic theory, examples of stakeholders could be domestic producers, consumers, foreign producers, high income people, low income people, or the government.

“A high exchange rate may be good for consumers because it makes imported goods less expensive and forces domestic producers to be more efficient so that they compete with the less expensive imports. On the other hand, it is clearly a disadvantage for those domestic producers who suffer from the competition from imports which become less expensive with the higher value of the currency.” or “Supply side policies may be very good in terms of creating a more flexible labour force and achieving economic growth. However, it may lower the standards of living of workers who may suffer from deregulation of the labour laws.”

Practice

· The law of demand says that the higher the price of a good, the lower will be the quantity demanded. This accounts for the downward-sloping demand curve. However, there are exceptions to this law. Two exceptions to the law are ____________________________.

· There are several factors which cause a shift in the supply curve. These are ___ and . . . The most important of these is _____ because ____ . . .

· Minimum prices are good for _______________ because_____ . . .. However, they can be considered to be negative for __________ because _______ . . . .

· Maximum prices are good for _______________ because_____ . . . However, they can be considered to be negative for __________ because ______ . . . .

· Subsidies are good for _____ because ___ . . However, . . .

· The answer to the question, “Should prices be increased?” depends on many things. It depends on ______ . . .

· There are four main central macroeconomic objectives which every government pursues. These are: ____ . . . The difficulty that governments face is that when they pursue one objective, it is highly likely that other objectives will come into conflict. For example, ___ . . (You can do this many times)

· In the short run, economists agree that the aggregate supply curve is upward sloping. There is considerable controversy over the likely shape of a country’s long run aggregate supply curve. Neo-Keynesians believe that ___ . . . Neo-classical economists, on the other hand, argue that ____ …. However, economists agree that the LRAS curve is vertical at the full employment level of output. (This writing would obviously be accompanied by several diagrams!)

· Increasing aggregate demand may be good when ___ . . However, if the economy is __ . . . . .

· Demand management may be appropriate for solving ____ unemployment. However, if the unemployment is ___ . . then increasing AD is likely to ___ . . .

· In the short run, there may be a trade-off between inflation and unemployment. However, ___ . . . .

· The advantages and disadvantages of tariffs depend on the various stakeholders. The diagram showing the effect of a tariff is very useful for pointing out the various advantages and disadvantages. As can be seen in the diagram below, ___ . . .

· A country may decide to deal with a current account deficit by using expenditure reducing policies. These include __ . . . The problems with these are __ . . . An alternate policy would be expenditure switching. This can be done by ____ . . Disadvantages associated with these are ___ . . .

· A high value of a currency is good for ____ and . . . . because ___ . . . However, it can be very damaging for ___ . . . because _____ . . .

· A low value of a currency is good for ____ and . . . . because ___ . . . However, it can be very damaging for ___ . . . because _____ . . .

· Economic growth is highly desirable because ____ . . . However, on the negative side, __ .. . .

· The principal difference between economic growth and economic development is that ______ . . . .

· When considering the advantages and disadvantages of foreign direct investment, it is important to look at the implications for both growth and development. In terms of achieving economic growth, FDI is very important because ___ . . . However, when considering economic development, there are different arguments. For example, __ . .

· When considering the advantages and disadvantages of international trade to LDCs, it is important to look at the implications for both growth and development. In terms of achieving economic growth, trade is very important because ___ . . . However, when considering economic development, there are different arguments. For example, __ . ..

· When considering the advantages and disadvantages of foreign aid, it is important to look at the implications for both growth and development. In terms of achieving economic growth, aid can be very important in filling several gaps such as ___ . . However, the implications in terms of development are ___ . . .

· An outward-oriented strategy may be successful in terms of achieving _____. However, the disadvantages may be ___ . . . .

· The biggest disadvantage of an inward-oriented strategy is that ____ . .

Assessment Criteria

Part (a) 10 marks

LevelMarks

0The work does not reach a standard described by the descriptors below.0

1There is little understanding of the specific demands of the question.

Relevant economic terms are not defined.

There is very little knowledge of relevant economic theory.

There are significant errors.1–3

2There is some understanding of the specific demands of the question.

Some relevant economic terms are defined.

There is some knowledge of relevant economic theory.

There are some errors.4–6

3There is understanding of the specific demands of the question.

Relevant economic terms are defined.

Relevant economic theory is explained and applied. Where appropriate, diagrams are included and applied. Where appropriate, examples are used.

There are few errors.7–8

4There is clear understanding of the specific demands of the question.

Relevant economic terms are clearly defined.

Relevant economic theory is clearly explained and applied.

Where appropriate, diagrams are included and applied effectively. Where appropriate, examples are used effectively.

There are no significant errors.9–10

Part (b) 15 marks

LevelMarks

0The work does not reach a standard described by the descriptors below.0

1There is little understanding of the specific demands of the question.

Relevant economic terms are not defined.

There is very little knowledge of relevant economic theory.

There are significant errors.1–5

2There is some understanding of the specific demands of the question.

Some relevant economic terms are defined.

There is some knowledge of relevant economic theory.

There are some errors.6–9

3There is understanding of the specific demands of the question.

Relevant economic terms are defined.

Relevant economic theory is explained and applied. Where appropriate, diagrams are included and applied. Where appropriate, examples are used.

There is an attempt at synthesis or evaluation.

There are few errors.10–12

4There is clear understanding of the specific demands of the question.

Relevant economic terms are clearly defined.

Relevant economic theory is clearly explained and applied.

Where appropriate, diagrams are included and applied effectively. Where appropriate, examples are used effectively.

There is evidence of appropriate synthesis or evaluation.

There are no significant errors.13–15

42

Section 1 – Microeconomics

Section 1.1 – Markets

2000MH

(a) State the law of demand and distinguish between movements along the demand curve and shifts of the demand curve.

[10 marks]

(b) Explain, with the help of diagrams, the effect that an increase in the price of petrol is likely to have on

(i) the market for cars

(ii) the market for coal

[15 marks]

2005MS

(a) Explain how a buffer stock system might be used to stabilize agricultural prices.

[10 marks]

(b) Discuss the view that intervention in agricultural markets causes more problems than it solves.

[15 marks]

2007MS

(a) Explain the signalling and incentive functions of price in a market economy.

[10 marks]

(b) Evaluate the proposition that government intervention in the market for tobacco

is justified.

[15 marks]

2010MS

(a) With the aid of at least one diagram, explain the difference between a

movement along an existing demand curve for a good and a shift of the

demand curve for a good.

[10 marks]

(b) Evaluate the view that the market forces of demand and supply will

always lead to the best allocation of resources.

[15 marks]

2010MS

(a) “World food prices have increased sharply over the past five years.”

With the aid of at least one diagram, explain how one possible demand

factor and one possible supply factor may have caused this increase.

[10 marks]

(b) Consider the following two conflicting views:

“Food prices are best left to market forces.”

“Government should intervene to control rising food prices.”

Evaluate whether rising food prices should be left to market forces or

controlled by government.

[15 marks]

2011MS

(a) Explain the roles of market forces and government in allocating resources in a mixed economy..

[10 marks]

(b) Evaluate the extent to which market forces should be used to lessen the problem of environmental pollution.

.

[15 marks]

2012MS

(a) Explain the possible economic advantages to consumers that arise from living in a free market economy

[10 marks]

(b) Evaluate the economic implications of a government policy to provide merit goods free of charge..

.

[15 marks]

2012MS

(a) Explain how, in a market system, changes in demand and supply allocate scarce resources through the signalling and incentive functions of price.

[10 marks]

(b) Evaluate the view that government intervention in agricultural markets will create more problems than it solves.

.

[15 marks]

Section 1.2 – Elasticities

2000MS

(a) What are the various factors that determine the value of :

(i) price elasticity of demand and

(ii) income elasticity of demand?

[12 marks]

(b) Assess the importance of price elasticity and income elasticity of demand for business decision-making.

[13 marks]

2002NS

(a) Explain the factors which influence price elasticity of supply. Illustrate your answer with reference to the market for a commodity or raw material.

[12 marks]

(b) Discuss the importance of price elasticity of supply and price elasticity of demand for producers of primary commodities in less developed countries.

[13 marks]

2004MH

Discuss the economic arguments for and against imposing substantially higher levels of taxation on the sale of alcohol.

[25 marks]

2008MS

(a) “The price elasticity of demand and the price elasticity of supply for many

primary commodities tend to be low.” Explain what is meant by this statement,

and how this contributes to the problem of price instability for primary

commodity producers.

[10 marks]

(b) Evaluate the view that it is best to allow primary commodity prices to be determined purely through the free interaction of market forces.

[15 marks]

2010MH

(a) Explain the importance of price elasticity of demand and cross-elasticity of

demand for business decision-making.

[10 marks]

(b) Studies have shown that the demand for tobacco tends to be highly price inelastic.

Evaluate the view that governments can best reduce smoking by substantially

increasing taxes on cigarettes.

[15 marks]

2013MH TZ2

(a) Explain the factors which might influence the cross price elasticity of demand between different products..

[10 marks]

(b) Examine the importance of income elasticity of demand for the producers of primary products, manufactured goods and services.

[15 marks]

2013MS TZ1

(a) Explain why the price elasticity of demand for primary commodities tends to be relatively low while the price elasticity of demand for manufactured products tends to be relatively high...

[10 marks]

(b) “The income elasticity of demand for primary products tends to be lower than that for manufactured products and services.” Examine the implications of this for producers and for the economy as a whole.

[15 marks]

Section 1.3 – Government Intervention

2004NH

(a) Explain the concepts of maximum and minimum price controls.

[10 marks]

(b) Evaluate the idea that government intervention in the form of price ceilings and price floors is well intentioned, but often leads to undesirable side effects.

[15 marks]

2007NS

(a) Using supply and demand analysis, explain why the price of agricultural goods tends to fluctuate more than the price of manufactured goods.

[10 marks]

(b) Evaluate the possible role of price controls in agricultural markets.

[15 marks]

2010NS

(a) Explain how taxes and subsidies differ in their effect on the market price and quantity of a good.

[10 marks]

(b) “It is essential that a government supports its farmers by subsidizing agricultural output.” Evaluate this view.

[15 marks]

2013MS TZ2

(a) Explain why a government might impose a price ceiling on the market for rented accommodation and a price floor on the market for agricultural products.

[10 marks]

(b) Evaluate the possible consequences of price controls on the stakeholders in a market.

[15 marks]

2013NH

(a) Using a price ceiling diagram, analyse the impact a maximum price might have on the market for food.

[10 marks]

(b) Discuss the policies a government might use to make food more affordable to low income groups.

[15 marks]

Section 1.4 – Market Failure

2000MS

(a) Carefully distinguish between merit goods and public goods, illustrating your answer with examples.

[12 marks]

(b) To what extent is it desirable that the government should provide merit goods and public goods?

[13 marks]

2002NS

(a) What are positive externalities and how do they arise? Illustrate your answer with examples.

[10 marks]

(b) To what extent should government attempt to influence markets where positive externalities exist?

[15 marks]

2003NS

(a) Why do markets sometimes fail to set socially acceptable prices?

[12 marks]

(b) To what extent can governments overcome this form of market failure? Illustrate your answer with examples.

[13 marks]

2003NH

(a) “National policies and international agreements must be implemented in order to reduce global environmental problems.”

Using the concept of market failure, explain the statement above from an economist’s point of view.

[10 marks]

(b) With reference to both national policies and international agreements, discuss three solutions that could be recommended by economists.

[15 marks]

2006MH

(a) Carefully distinguish between merit goods, demerit goods and public goods.

[10 marks]

(b) Evaluate the view that governments should always intervene in markets for such goods as cigarettes and alcohol.

[15 marks]

2009MS

(a) Using an appropriate diagram, explain how negative externalities are a type of market failure.

[10 marks]

(b) Evaluate the measures that a government might adopt to correct market failure arising from negative externalities

[15 marks]

2009NS

(a) Using at least one production possibility curve diagram, explain the concepts of

scarcity, choice, opportunity cost and resource allocation.

[10 marks]

(b) “The process of resource allocation is most efficiently carried out through the

free interaction of demand and supply. This means the provision of merit goods,

such as health care and education, should always be left to market forces.”

Evaluate this statement.

[15 marks]

2010NH

(a) Explain why negative externalities are an example of market failure.

[10 marks]

(b) Evaluate three policies that governments might implement to reduce negative

externalities associated with the environment.

[15 marks]

2011MS

(a) Explain the distinction between public goods and merit goods and why these goods are examples of market failure.

[10 marks]

(b) “The operation of the free market is always the best way to allocate scarce resources.” Evaluate this statement.

[15 marks]

2013MH TZ1

(a) Using diagrams, explain how the incidence of an indirect tax may be affected by the price elasticity of demand.

[10 marks]

(b) To what extent might the problems of negative externalities of consumption be resolved by the use of indirect taxation?

[15 marks]

2013MS TZ1

(a) Analyse the consumption externalities which might arise from the provision of education and health care for the citizens of a country.

[10 marks]

(b) Evaluate the use of government policies to increase the consumption of health care.

[15 marks]

2013MS TZ2

(a) Explain why common access resources, such as fishing grounds, might become depleted in the absence of a price mechanism.

[10 marks]

(b) Evaluate the view that carbon taxes represent the most effective government response to the threat to sustainability posed by the use of fossil fuels.

[15 marks]

2013NH

(a) Explain why governments impose indirect taxes.

[10 marks]

(b) Discuss two possible government responses to threats to sustainability.

[15 marks]

2013NS

(a) Using a diagram, explain why demerit goods are considered to be an

example of market failure.

[10 marks]

(b) Evaluate two possible government responses that could be used to address the problem of demerit goods.

[15 marks]

Section 1.5 – Theory of the Firm

2000MH

(a) “Monopoly price is higher and output smaller than is socially ideal. The public is the victim.” (J.K. Galbraith, 1974).

Explain the economic reasoning behind the statement that “monopoly price is higher and output smaller than is socially ideal.

[12 marks]

(b) Do you agree that the public is always the ‘victim’ of monopoly? Justify your answer

[13 marks]

2002MH

Discuss and evaluate the proposition that perfect competition is a more efficient market structure than monopoly.

[25 marks]

2004MH

(a) In what ways do firms operating in different market structures compete?

[10 marks]

(b) Discuss the view that more competition there is within each industry the better.

[15 marks]

2005MH

(a) Explain how profit is determined in perfect competition.

[10 marks]

(b) “Whatever the type of market structure, profit maximization will always be the only goal of firms.” Discuss.

[15 marks]

2005NH

(a) Explain the differences between monopolistic competition and oligopoly as market structures.

[10 marks]

(b) Discuss the differences between a collusive and a non-collusive oligopoly.

[15 marks]

2007MH

(a) Explain how barriers to entry may affect market structure.

[10 marks]

(b) Evaluate the view that monopoly is an undesirable type of market structure.

[15 marks]

2007NH

(a) Explain the difference between short-run equilibrium and long-run

equilibrium in monopolistic competition

[10 marks]

(b) “Perfect competition is a more desirable market form than monopolistic

competition.” Discuss.

[15 marks]

2008MH

(a) Explain how a firm operating in an oligopolistic market might attempt to

increase its market share.

[10 marks]

(b) Evaluate the view that producers, and not consumers, are the main beneficiaries

of oligopolistic market structures.

[15 marks]

2008NH

(a) Explain the concepts of allocative and productive (technical) efficiency.

[10 marks]

(b) “Monopolies are inefficient and therefore always act against the public interest.”

Discuss this statement.

[15 marks]

2009MH

(a) In the theory of the firm, a distinction is made between short-run cost curves

and long-run cost curves. Using appropriate cost curve diagrams, explain this

distinction.

[10 marks]

(b) Evaluate the view that greater economic efficiency will always be achieved in

perfect competition as compared to monopoly.

[15 marks]

2009NH

(a) Explain why a firm may practice price discrimination and the necessary conditions for it to take place.

[10 marks]

(b) “Although a firm may pursue a range of goals, economists usually assume that profit maximization is the main goal.” Discuss this statement.

[15 marks]

2011MH

(a) Using an appropriate diagram, explain how a monopolist might be able to make supernormal (abnormal) profits in the short-run, and why these profits might continue to be earned in the long-run.

[10 marks]

(b) Evaluate the view that monopolistic competition is a more economically desirable market form than monopoly.

.

[15 marks]

2011MH

(a) Using at least one diagram, explain why a firm in perfect competition might only be able to make supernormal (abnormal) profits in the short-run and not in the long-run..

[10 marks]

(b) Evaluate the view that perfect competition is a more desirable market form than oligopoly..

.

[15 marks]

2012MH

(a) Explain the economic factors which may encourage the formation of a monopoly.

.

[10 marks]

(b) Evaluate the view that natural monopoly is a more desirable market

structure than perfect competition.

.

[15 marks]

2012MH

(a) Explain why, in markets dominated by a few firms, prices may remain relatively stable.

[10 marks]

(b) “An industry with a larger number of firms will experience lower prices and greater efficiency than an industry with a smaller number of firms.” Evaluate this view..

[15 marks]

2012NH

(a) Explain why a monopoly can earn supernormal (abnormal) profits in the long run.

[10 marks]

(b) Evaluate the reasons why a government might allow a competitor into an industry that was previously a monopoly.

[15 marks]

2013MH-

TZ1

(a) Explain how welfare loss may result from monopoly power.

(a) Explain why a monopoly can earn supernormal (abnormal) profits in the long run.

[10 marks]

(b) Discuss the effectiveness of government policies (legislation and regulation) to reduce monopoly power.

(b) Evaluate the reasons why a government might allow a competitor into an industry that was previously a monopoly.

[15 marks]

2013MH

TZ2

(a) Distinguish between decreasing returns to scale and the law of diminishing returns.

[10 marks]

(b) Using diagrams, compare and contrast the market structure of monopoly with

that of perfect competition..

[15 marks]

Section 1 – Microeconomics – Marking Schema

Section 1.1 – Markets

2000MH

(a) State the law of demand and distinguish between movements along the demand curve and shifts of the demand curve

Law of demand

Definitions of the law of demand that do not make reference to the “time period”

and “ceteris paribus” (other things being equal) are technically incorrect and should only be given partial credit.

Movements along the demand curve are caused by price changes

· a price increase will bring about a contraction of demand

· a price fall will bring about an extension of demand

Shifts of the demand curve are caused by changes in various factors including the following:

· tastes

· the number and price of substitute goods

· the number and price of complementary goods

· income

· distribution of income

· expectations of future price increases

· the time period under consideration

[10 marks]

(b) Explain, with the help of diagrams, the effect that an increase in the price of petrol is likely to have on

(i) The market for cars

Candidates could

· note that the increase in the price of petrol will cause a contraction in the demand for petrol

· consider the likely effect on the quantity demanded of petrol given the price elasticity of demand for petrol

· state that petrol and cars are complements or in joint demand

· state that the increase in the price of petrol will bring about a shift to the left of the demand curve for cars

· consider the importance of cross price elasticity of demand

· provide accurate diagrams illustrating the effects on the market price of cars

(ii) The demand for coal

Candidates could

· state that petrol and coal are substitutes

· recognise that the increase in the price of petrol will bring about a shift to the right of the demand curve for coal

· consider the importance of cross price elasticity of supply for coal

· provide accurate diagrams illustrating the effects on the market price of coal.

N.B. Mark parts (b)(i) and (ii) together and use the mark band descriptor for

[15 marks].

[15 marks]

2005MS

(a) Explain how a buffer stock system might be used to stabilize agricultural prices.

definition of buffer stock system

· explanation of the reasons for the existence of buffer stock systems

· explanation of the instability of agricultural prices through inelastic demand and supply, along with the unpredictable nature of the supply side in agriculture

· explanation of how a buffer stock system works in terms of minimum and maximum prices and intervention buying and selling

· correct application of the buffer stock diagram

Examiners should be aware that candidates may take a different approach,

which if appropriate should be rewarded.

[10 marks]

(a) Discuss the view that intervention in agricultural markets causes more problems than it solves.

Points for discussion might include:

· the different forms of intervention

· commodity agreements

· minimum/maximum price controls

· buffer stock schemes

· fair trade schemes

· subsidies

· protectionism e.g. tariffs

· the arguments for intervention

· stabilize prices

· provide a stable income for producers

· combat falling agricultural commodity prices for producers

· protect employment in agriculture

· ensure adequate food supplies

· provide affordable, stable prices for consumers

· prevent rural depopulation

· reduce balance of payments problems

· the arguments against intervention

· interference in the price mechanism can cause a misallocation of resources, e.g. shortages and surpluses

· costs of operating buffer stock schemes, e.g. storage costs, management costs, setting a target price, perishable goods

· problems of enforcing commodity agreements

· the financial cost of providing agricultural subsidies

Examiners should be aware that candidates may take a different approach,

which if appropriate should be rewarded.

[15 marks]

2007MS

(a) Explain the signalling and incentive functions of price in a market

economy.

Answers may include:

· definition of market economy

· description of market forces and how resources are allocated

· explanation of the signalling function in relation to producers and consumers: e.g. as consumers increase their demand for a good (shift of demand to the right) the price of the good and profits rise, acting as a “green light” signal to producers to increase their output (movement along the supply curve); as the supply of a commodity becomes more scarce, supply shifts to the left and the rise in price signals to consumers to reduce their demand (movement along the demand curve); these changes in demand and supply bring about changes in resource allocation

· explanation of the incentive function in relation to producers: e.g. an increase in demand for a product will raise its price and profitability and provide the incentive for producers to supply more/new firms to enter the market; the higher demand for the product will also lead to an increase in demand for labour to produce the product, causing wages to rise, which will in turn provide an incentive for workers to seek employment in that industry; these changes in demand and supply bring about changes in resource allocation

· use of appropriate diagrams e.g. demand and supply

Candidates may not use the specific terms: signalling and incentive but may explain the

functions of price using different terminology and they should be fully rewarded for this.

[10 marks]

(b) Evaluate the proposition that government intervention in the market for

tobacco is justified.


· tobacco as a demerit good

· definition of demerit good

· explanation of forms of government intervention in the market for tobacco, e.g. in terms of an increase in indirect taxation and increased regulation(age restrictions, health warnings, etc.)

· arguments in support of the proposition, e.g. in terms of overprovision of demerit goods, negative externalities, MSC and MSB and resource allocation

· arguments against the proposition, e.g. in terms of distortion of signalling and incentive functions, consumer choice, problems of government intervention, employment in these industries, parallel markets, etc.

· use of appropriate diagrams e.g. MSC, MSB but not necessarily both – either is sufficient.

Examiners should be aware that candidates may take a different approach, which if

appropriate, should be rewarded.

Effective evaluation may be to:

· consider short run versus long run consequences

· examine the impact on different stakeholders

· discuss advantages and disadvantages

· prioritize the arguments

[15 marks]

2010MS

(a) With the aid of at least one diagram, explain the difference between a

movement along an existing demand curve for a good and a shift of the

demand curve for a good.

Answers should include:

· a definition of demand

· an explanation that a change in the price of the good itself leads to a

· movement along the existing demand curve as the price of the good is one of the axes

· a reference to the ceteris paribus assumption

· a correctly labelled diagram showing movement along the demand curve and the resultant change in price and quantity demanded

· an explanation that a change in any of the non-price determinants of demand

· will lead to a shift of the demand curve to either the left or right e.g. income,

· tastes, price of other goods

· a correctly labelled diagram showing a shift of the demand curve for a good.


· examples of goods to illustrate such movements and shifts, particularly

· complements and substitutes

· diagrams may or may not include a supply curve to illustrate the change in price and quantity.

Both a movement and a shift in demand needed for full marks (one or two

diagrams may be used).

Examiners should be aware that candidates may take a different approach

which if appropriate, should be rewarded.

[10 marks]

(b) Evaluate the view that the market forces of demand and supply will

always lead to the best allocation of resources.


· a definition of resource allocation, best allocation of resources

· an explanation that “market forces of demand and supply” refers to a free market system in which demand and supply are left alone to set prices in the economy

· an explanation of “invisible hand”

· an explanation of how the price mechanism is signalled by changes in

consumer demand and producer supply

· an explanation of how price acts as an incentive to consumers to make decisions about how to get the best value for their money

· an explanation of how price acts as an incentive to producers who decide

· how to best allocate their productive resources in order to make the most profit

· an explanation that prices will rise or fall until a shortage or surplus is eliminated and there is an equilibrium price and quantity arrived at in the market

· an explanation of how consumers acting in their own best interest and

· producers acting in their own best interest produce a situation in which there is no pressure in the market and resources are optimally allocated

· an explanation that the free market rarely leads to the best allocation of resources because of market failures

· reference to some market failures (lack of provision of public goods,

· overprovision of demerit goods, externalities

· an explanation that government intervention is often necessary to assist in resource allocation and correct market failures.

· Examiners should be aware that candidates may take a different approach which if appropriate, should be rewarded.

·


consider short-term versus long-term consequences

examine the impact on different stakeholders

discuss advantages and disadvantages

prioritize the arguments.

[15 marks]

2010MS

(a) “World food prices have increased sharply over the past five years.”

With the aid of at least one diagram, explain how one possible demand

factor and one possible supply factor may have caused this increase.


· a definition of demand; definition of supply

· a demand and supply diagram, or diagrams, showing demand shifting to the right and supply shifting to the left

· an explanation of the adjustment process to a new, higher equilibrium price

· an explanation of one possible demand factor, e.g. rising real disposable

incomes in countries such as China and India, changing tastes

· an explanation of one possible supply-side factor, e.g. rising input costs,

· the impact of competitive supply, e.g. more output devoted to bio-fuels and less to food.


· an explanation of any possible demand or supply factors that may also contribute to an explanation of the rise in food prices.

Examiners should be aware that candidates may take a different approach

which if appropriate, should be rewarded.

[10 marks]

(b) Consider the following two conflicting views:

“Food prices are best left to market forces.”

“Government should intervene to control rising food prices.”

Evaluate whether rising food prices should be left to market forces or

controlled by government.


· an explanation of being “left to market forces”

· types of government intervention, e.g. buffer stocks, price controls and

subsidies

· arguments for market forces in terms of:

· the signalling, incentive and rationing functions of price

· problems of buffer stocks, price controls and subsidies

· general objections to government intervention such as market distortions,

· implications for the level of taxation and opportunity costs

· arguments for government intervention in terms of:

· advantages of the various types of government intervention, e.g. stable prices for consumers and producers

· market failure arguments, e.g. adequate food supply needs to be available to the whole population

· impact of adequate food supply on labour productivity and health

· equity and equality arguments.

Examiners should be aware that candidates may take a different approach which if appropriate, should be rewarded.






[15 marks]

2011MS

(a) Explain the roles of market forces and government in allocating resources in a mixed economy


· definitions of market forces, resources and mixed economy

· an explanation of the terms market forces, resource allocation and mixed economy

· an explanation of the role of price as a signal and as an incentive in the process of resource allocation

· use of supply and demand diagrams to illustrate resource allocation

· the role of the public sector

· the provision of public and merit goods by the government.


· an explanation of the economic problem in terms of scarcity, choice and opportunity cost

· use of production possibility curve diagrams

· other aspects of the public sector, e.g. nationalized industries

· how taxation influences resource allocation, e.g. externalities

· consideration of the impact of government on the labour market, e.g. minimum wage.


[10 marks]

(b) Evaluate the extent to which market forces should be used to lessen the problem of environmental pollution.


· a definition of environmental pollution as a negative externality of production or consumption

· examples of environmental pollution

· use of a MSC/MSB diagram to illustrate the problem of resource misallocation

· consideration of alternatives to market forces e.g. through the use of government legislation and regulations

· the advantages and disadvantages of government regulation

· consideration of government use of market intervention policies, such as taxation, subsidies and tradable permits

· the advantages and disadvantages of government use of market based policies

· international cooperation among governments

· consideration of complete reliance on market forces, i.e. no government intervention, relying on the signalling and incentive functions of price to solve the problem

· the advantages and disadvantages of complete reliance on market forces

· examples of different approaches.


· consider short-term versus long-term consequences



· prioritize the arguments.


[15 marks]

2012MS

(a) Explain the possible economic advantages to consumers that arise from living in a free market economy


· a definition of a free market economy

· an explanation of reliance on price to allocate goods and services

· an explanation of reliance on supply and demand to set prices and wages

· consumers enjoy an absence of shortages and surpluses in markets

· consumers enjoy choice and a wide range of goods and services

· producers respond to the wishes of consumers via price signals

· consumers enjoy lower prices due to competition.


· use of a demand/supply diagram indicating a change in resource allocation

· profit motive allows producers to respond quickly to changes in consumer tastes

· reference to Adam Smith and the self-regulating nature of markets

· consumers can participate in private ownership of the means of production

· consumers may benefit from competition between firms

· consumers enjoy relative efficiency.


[10 marks]

(b) Evaluate the economic implications of a government policy to provide merit goods free of charge..


· a definition of merit goods

· a definition of merit goods as a form of market failure

· a definition of merit goods as those under-consumed at market price

· an explanation of achievement of the socially optimum level of output

· use of an MSC/MSB diagram

· existence of strong positive externalities in merit goods

· private benefits may be underestimated leading to under-consumption

· discussion of benefits of merit goods, e.g. impact on economic growth

· costs of merit goods are borne by taxpayers

· opportunity costs of providing merit goods

· relative costs and benefits of direct provision or subsidy to supply merit goods

· advantages and disadvantages of state provision

· physical/psychological crowding out of the private sector by labour intensive merit good provision

· promotion of greater equality as the less affluent have access to merit goods

· examples of particular merit goods provided free in particular countries

· evaluation of above arguments.







.

[15 marks]

2012MS

(a) Explain how, in a market system, changes in demand and supply allocate scarce resources through the signalling and incentive functions of price.


· a definition of a market system

· a definition of demand

· a definition of supply

· an explanation of the term “scarce resources”

· an explanation of how changes in demand or supply influence resource allocation through the signalling function of price

· an explanation of how changes in demand or supply influence resource allocation through the incentive function of price

· use of relevant demand and supply diagrams

Examiners should be aware that candidates may take a different approach which if appropriate, should be rewarde

[10 marks]

(b) Evaluate the view that government intervention in agricultural markets will create more problems than it solves.


· methods of government intervention:

· minimum and maximum price controls

· buffer stock schemes

· commodity agreements

· subsidies

· import controls

· state ownership

· export taxes

· an explanation of the problems of agricultural markets in terms of:

· high food prices for low income consumers

· fluctuating prices and producers’ incomes

· problems of overdependence on agriculture

· relatively low productivity of the agricultural sector

· low income elasticity of demand

· an explanation of how government intervention may solve the problems of agricultural markets:

– helps to stabilize producers’ incomes and prices to consumers

· may increase productivity in the agricultural sector

· use of relevant diagram(s)

· problems of government intervention in agricultural markets: dependence amongst producers

– misallocation of resources

– financial cost of subsidies

– corruption

· advantages and disadvantages of different methods of government intervention

· evaluation of above arguments.







.

[15 marks]

Section 1.2 – Elasticities

2000MS

(a) What are the various factors that determine the value of :

(i) price elasticity of demand and

(ii) income elasticity of demand?

PED determined by

· the availability of substitutes

· degree of necessity

· proportion of income accounted for by the good

· habit

· the time period etc

YED tends to be

· relatively high in the case of services and manufactured goods

· and low in the case of primary commodities.

· YED and normal/inferior goods.

[12 marks]

(b) Assess the importance of price elasticity and income elasticity of demand for business decision-making.

Possible areas for discussion include:

· PED . relationship between price increases/decreases and total revenue, hence profits

· YED. relationships between higher/lower income levels, boom/recession, and total revenue, hence profits.

Reward good use of relevant examples. Provided some reference is made to both types of elasticity, an unbalanced answer thoroughly dealing with one type can reach the higher bands.

[13 marks]

2002NS

(a) Explain the factors which influence price elasticity of supply. Illustrate your answer with reference to the market for a commodity or raw material.

Candidates should define PES. Some factors which influence the PES of commodities are:

· Number of producers and barriers to entry into the industry eg oligopolisctic oil industry

· The relationship between producers, e.g cartels, commodity agreements etc.

· The availability of producer substitutes

· The time period (distinction between very short, short and long run)

· Storage of stocks – possible with minerals but not with food stuffs

· Elasticity of supply of factor inputs – factor endowments, lead times etc

Candidates who explain the factors which influence PES without any reference to a commodity or raw material should be restricted to a maximum of [6 marks]

Candidates who confuse PED with PES should be limited to a maximum of [4 marks] providing there is something of relevance.

[12 marks]

(b) Discuss the importance of price elasticity of supply and price elasticity of demand for producers of primary commodities in less developed countries.

This part of the question asks the candidate to apply the knowledge provided in response to (a) using the problems of LDCs as commodity producers. Reference to real world examples should be rewarded.

Candidates might be expected to consider the effects of degrees of inelasticity of supply and demand on:

· Export revenues and the external balance

· The exchange rate

· Fluctuating effects on local employment and investment

Reward any other reasonable argument or example.

Particular credit should be given to those candidates who are able to relate the importance of PED and PES to primary commodity producers in LDCs, rather than just discussing the importance of the concepts in general terms.

Also give credit to those candidates who widen their answer by examining the importance of PED and PES for the economy at large for LDCs, e.g. in relation to the terms of trade, balance of payments, depreciation, government revenues etc.

[13 marks]

2004MH

Discuss the economic arguments for and against imposing substantially higher levels of taxation on the sale of alcohol.

Answers should be rewarded for their ability to apply economic concepts and

theory to the particular case of taxation on alcohol, and to examine arguments

both for and against.

Possible arguments for:

· Demerit good

· Negative externalities

· Socially optimal level of output

· To raise tax revenues.

Possible arguments against:

· Employment loss and Loss of profits for firms

· Higher prices for consumers

· Loss of business for connected industries e.g. restaurants

· Inflationary tendencies and Formation of parallel markets.

[25 marks]

2008MS

(a) “The price elasticity of demand and the price elasticity of supply for many primary commodities tend to be low.” Explain what is meant by this statement, and how this contributes to the problem of price instability for primary commodity producers.


· definition of PED and PES

· explanation of “low”, i.e. inelastic demand and inelastic supply

· explanation of price instability

· explanation of how inelastic demand and supply can lead to price instability.


· diagrams showing interaction of inelastic demand with inelastic supply and consequent shifts of demand and/or supply causing large price fluctuations

· an explanation of why demand and/or supply of commodities might shift

· equations for the calculation of PED and PES

· “low”, i.e. inelastic demand and supply having values of less than 1

· examples of commodities with unstable prices, e.g. oil

· explanations of why PED and PES tend to be low, e.g. necessities (PED), growing seasons(PES).

Examiners should be aware that candidates may take a different approach, which if appropriate, should be rewarded.

[10 marks]

(b) Evaluate the view that it is best to allow primary commodity prices to be determined purely through the free interaction of market forces.


· explanation of “free interaction of market forces”

· explanation of buffer stock schemes

· explanation of maximum and minimum prices

· explanation of commodity agreements

· advantages of market forces in terms of the signalling and incentive functions of price and how this leads to economic efficiency

· advantages of market forces in terms of the various drawbacks of buffer stock schemes, maximum and minimum prices and commodity agreements

· disadvantages of market forces in terms of price instability and uncertainty of income and employment of primary commodity producers

· disadvantages of market forces in terms of the benefits of buffer stock schemes, maximum and minimum prices and commodity agreements

· disadvantages of market forces for LDCs whose primary commodities are adversely affected in international markets due to subsidies and protectionism in some developed countries.

Examiners should be aware that candidates may take a different approach which if appropriate, should be rewarded. Effective evaluation may be to:





[15 marks]

2010MH

(a) Explain the importance of price elasticity of demand and cross-elasticity of demand for business decision-making.


· a definition of PED

· a definition of XED

· the link between PED, price changes and changes in total revenue

· the importance of XED in terms of changes in price of substitutes and complements

· examples of PED and XED in real life (products with high/low elasticities; products related are complements or substitutes).

· Answers may include:

· an explanation that PED and XED are extremely difficult to accurately measure in reality

· use of diagrams to show the relationship between PED, price changes and changes in total revenue

· use of diagrams to illustrate the complement/substitute relationship.


[10 marks]

(b) Studies have shown that the demand for tobacco tends to be highly price inelastic. Evaluate the view that governments can best reduce smoking by substantially increasing taxes on cigarettes.


· cigarettes as an example of market failure having the characteristics of demerit goods

· use of an MSC/MSB diagram to show the negative externalities associated with the consumption of cigarettes, candidates may use a simple supply and demand diagram

· an explanation of inelastic demand and the implications for a tax on cigarettes; low PED means a tax may not lead to a significant decrease in quantity of cigarettes demanded

· distinction between inelastic demand for tobacco in general and elastic demand for particular brands

· the incidence of taxation may be considered

· consideration of the extent of the tax increase; tax may have to increase a lot to have a major impact

· the problem of relating the tax to the value of the external costs

· the impact on government revenues and spending possibilities; revenue will increase a lot in view of the low PED

· an assessment of alternative policies such as negative/positive advertising and direct controls.

Examiners should be aware that candidates may take a different approach which if appropriate, should be awarded.






[15 marks]

2013MH TZ2

(a) Explain the factors which might influence the cross price elasticity of demand between different products.


· definitions of cross price elasticity of demand

· theory to include explanation of formula, significance of positive and negative coefficient of cross price elasticity. Emphasis is likely to be on complements and substitutes.

· diagrams to show markets where the change in price of one good influences demand for another good positively (substitutes) or negatively (complements)

· examples of substitutes, complements and unrelated goods.

.

[10 marks]

(b) Examine the importance of income elasticity of demand for the producers of primary products, manufactured goods and services.

N.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.


· definitions of income elasticity of demand, primary products

· theory of the importance of income elasticity for producers of primary products, manufactured goods and services

· diagrams to show the effect of differing coefficients of income elasticity of demand

· examples of different types of primary products, manufactured goods and services

· synthesis and evaluation (examine).

Examination may include: knowledge that a change in income will have differing effects on the three types of products specified in the question necessitating different strategies for the producers of these products, for example, diversification, value added.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Opinions or conclusions should be presented clearly and should be supported by appropriate examples.

[15 marks]

2013MS TZ1

(a) Explain why the price elasticity of demand for primary commodities tends to be relatively low while the price elasticity of demand for manufactured products tends to be relatively high.


· definitions of price elasticity of demand, primary commodities and manufactured products

· application of theory of price elasticity of demand to primary commodities and manufactured products, explaining high and low PED, including reference to factors that determine the price elasticity of demand of primary products and of manufactured goods, eg, degree of necessity, availability of substitutes

· diagrams to show the different degrees of price elasticity of demand

· examples of primary commodities and manufactured products to which this might be, or has been, applied.

.

[10 marks]

(b) “The income elasticity of demand for primary products tends to be lower than that for manufactured products and services.” Examine the implications of this for producers and for the economy as a whole.



· definitions of income elasticity of demand, primary products and manufactured products/services; explanation of low YED

· application of theory of income elasticity of demand to primary products, manufactured products and services; distinction between income inelastic and income elastic goods and services in relation to primary products, manufactured products and services

· diagrams to show the possible impact on demand with appropriate explanation

· examples of goods with different income elasticities of demand, perhaps related to ELDCs and EMDCs

· synthesis or evaluation (examine).

Examination may include: a consideration of the different implications for producers in terms of the rate of expansion of industries and hence future profitability; the implications for resource allocation; the implications for relative growth rates of the primary, secondary and tertiary sectors of the economy; the different effects for ELDCs and EMDCs; an evaluation of the significance of income elasticity of demand for firms and the economy as a whole.



[15 marks]

2013NS

(a) Explain three determinants of price elasticity of demand (PED).


· definition of PED

· explanation of three determinants such as availability and closeness of substitutes, degree of necessity, percentage of income spent on thegood, time

· diagram showing demand curves, which are relatively price elastic/inelastic

· examples of goods whose demand is price elastic/inelastic.

If only one determinant is explained, a maximum of level 2 ([6 marks]) may be awarded. If only two determinants are explained, a maximum of level 3 ([8 marks]) may be awarded..

[10 marks]

(b) Examine the role of PED for firms making decisions regarding price changes and their effect on total revenue.



· definition of total revenue

· explanation of the law of demand and of the relationship between a change in price and the effect on total revenue and how the latter is dependent on PED.

· Explanation of why a good with price elastic demand would witness a decrease/increase in total revenue as a result of a price increase/decrease.

· Explanation of why a good with price inelastic demand would witness an increase/decrease in total revenue as a result of a price increase/decrease

· diagrams showing the effect of a price change on total revenue depending on the price elasticity of demand

· examples of firms making decisions to change price and the effect on their total revenue depending on the PED of good/service offered.

· synthesis or evaluation (examine).

To examine may include: the effect on revenue of price changes,

a consideration of other factors which may affect revenue other than price. PED is difficult to judge, it changes over time – once price changes the PED changes. Reference to factors other than price, which influence demand.


[15 marks]

Section 1.3 – Government Intervention

2004NH

(a) Explain the concepts of maximum and minimum price controls.

Responses should explain what maximum prices are, i.e. price ceilings set by the

government or some other agency. The price is not allowed to rise above this level, although it is allowed to fall below it. Better responses will give examples of when this may be appropriate, e.g. for rent controls or for basic goods to keep low for the lower wage earners. The best responses will also include a diagram.

Responses should explain what minimum prices are, i.e. price floors set by the

government or some other agency. The price is not allowed to fall below this level, although it is allowed to rise above it. Better responses will give examples of when this may be appropriate, e.g. for wages or to protect producers’ incomes. The best responses will also include a diagram.

Candidates who only deal with one of the concepts should be limited to a maximum of [5 marks].

[10 marks]

(b) Evaluate the idea that government intervention in the form of price ceilings and price floors is well intentioned, but often leads to undesirable side effects.

This part of the question asks the candidate to assess the effects of the imposition of maximum/minimum prices. It is best approached by taking examples and then

evaluating their success in terms of achieving the desired outcome. Candidates might refer to several of the examples in each section but it is equally acceptable to have a well developed discussion on one example only in each section.

Examples and areas for discussion might include:

Minimum prices

· setting minimum prices to protect producers incomes. The aim is usually to provide stability and to give a guaranteed minimum return to important producers. However, the effect is often to create a glut of the product, which the government will then have to buy and possibly store.

· protecting wages leads to an excess supply of labour

· firms with surpluses on their hands may try to evade the price controls and cut their prices

· black markets may evolve to clear the surpluses

· high prices may cushion inefficiency

· high prices may discourage firms from producing alternative goods that they could produce more efficiently.

· the above may be explained and then the candidate may go on to explain how the glut might be used as a buffer stock in future times when production is short.

Maximum prices

· setting a maximum price below the equilibrium price in a market will lead to excess demand. For example setting rent below the equilibrium rent in a market will lead to an excess demand for rented accommodation.

· the government may have to instigate rationing

· black markets may develop

· maximum prices reduce the quantity of an already scarce commodity.

· queues may develop

Examiners should be aware that candidates may take a different approach, which if appropriate should be fully rewarded.

Candidates who only deal with one of the concepts should be limited to a maximum of [8 marks].

[15 marks]

2007NS

(a) Using supply and demand analysis, explain why the price of agricultural goods tends to fluctuate more than the price of manufactured goods. [10 marks]

Candidates may include the following information:

· explanation of how price is determined

· indication that it is mainly the supply of agricultural products that is very volatile thus resulting in large price fluctuations

· explanation of different price elasticities of demand for agricultural and manufactured goods

· explanation of the different price elasticities of supply for agricultural and manufactured goods

· diagram showing shifts in supply and demand curves for both agricultural and manufactured goods resulting in large change of price for agricultural goods and smaller change of price for manufactured goods.

Candidates may refer to:

· income elasticity in connection with agricultural and manufactured goods

Examiners should be aware that candidates may take a different approach, which if appropriate should be rewarded. To reach level 3, an appropriate diagram must be included.

[10 marks]

(b) Evaluate the possible role of price controls in agricultural markets.

Candidates may include the following information:

· description of different types of price controls, that is, minimum/maximum prices, commodity agreements and buffer stock schemes

· explanation of why maximum, minimum prices and buffer stocks might be used e.g. protect consumers and producers

· consequences of maximum, minimum prices and buffer stocks e.g. shortages, surpluses etc.

· use of appropriate diagrams to illustrate: maximum and minimum prices and buffer stocks

· evaluation of the price controls.

Examiners should be aware that candidates may take a different approach, which if appropriate should be rewarded. Effective evaluation may be to:





[15 marks]

2010NS

(a) Explain how taxes and subsidies differ in their effect on the market price and quantity of a good.


· a definition of indirect taxes

· a definition of subsidies

· a diagram showing an indirect tax

· an explanation of the indirect tax diagram and its effect on the market price and quantity of a good

· a diagram showing a subsidy

· an explanation of the subsidy diagram and its effect on the market price and quantity of a good

· an explanation of the differences.

Examiners should be aware that candidates may take a different approach, which if appropriate should be rewarded. To reach level 3, an appropriate diagram must be included.

[10 marks]

(b) “It is essential that a government supports its farmers by subsidizing agricultural output.” Evaluate this view.


· Arguments in favour of subsidizing:

· encourages agricultural output

· sustains an agricultural sector/prevents rural depopulation

· reduces reliance on imports/may promote exports

· raises incomes of poor farming

· reduces prices to consumers

· makes food affordable for low income consumers

· encourages the consumption of healthy food as a merit good

· food security for a country in a crisis.

Arguments against subsidizing:

· misallocation of resources

· hidden costs/opportunity costs of funds that could be used for public services

· damage to foreign farmers/unfair protectionism

· cost to tax payers

· subsidies paid to rich farmers

· equity issues e.g. why not other sectors of the economy?

Examiners should be aware that candidates may take a different approach, which if appropriate should be rewarded. Effective evaluation may be to:





[15 marks]

2013MS TZ2



· definitions of price ceiling and price floor

· explanation of price ceilings in relation to rented accommodation: use of a maximum price below the equilibrium to protect consumers; explanation of price floors in relation to agricultural products: minimum price above the equilibrium to protect producers

· diagrams to show a price ceiling and a price floor

· examples of markets where price controls were used or might be used.

[10 marks]




· definitions of price controls and stakeholder

· explanation of price controls (price ceilings and price floors) used to explain possible problems and benefits

· diagrams to show possible negative and positive consequences, for example, shortages and surpluses

· examples of where problems and benefits have occurred, or might occur

· synthesis or evaluation.

Evaluation may include: the consequences in terms of shortages/surpluses, resource allocation, welfare effects, parallel markets and the effects on different stakeholders; the short-run and long-run implications; a judgment regarding the relative significance of problems and benefits.


Opinions or conclusions should be presented clearly and supported by appropriate examples.

[15 marks]

2013NH

2013MS TZ2

(a) Using a price ceiling diagram, analyse the impact a maximum price might have on the market for food.


· definitions of a price ceiling or maximum price

· an analysis of the possible impacts of a price ceiling. Shortages, inefficient

· resource allocation, welfare impacts, underground parallel markets and non-price rationing. A consideration of the impacts on various stakeholders

· diagram of a market supply and demand diagram showing a maximum price as specified in the question

· examples of markets where such price controls have been used or might be used in hypothetical situations.

[10 marks]

(b) Discuss the policies a government might use to make food more affordable to low income groups.



· definitions of identified policies and subsidies

· explanation of the use of subsidies, state provision of basic foodstuff and price controls. Diagrams to illustrate intervention, such as the use of subsidies and price ceilings

· examples of the application of the policies

· synthesis or evaluation (discuss).

Discussion may include: consideration of the advantages and disadvantages of the selected policies, impacts on stakeholders, short term and long term consequences.



[15 marks]



· definitions of price ceiling and price floor

· explanation of price ceilings in relation to rented accommodation: use of a maximum price below the equilibrium to protect consumers; explanation of price floors in relation to agricultural products: minimum price above the equilibrium to protect producers

· diagrams to show a price ceiling and a price floor

· examples of markets where price controls were used or might be used.

[10 marks]




· definitions of price controls and stakeholder

· explanation of price controls (price ceilings and price floors) used to explain possible problems and benefits

· diagrams to show possible negative and positive consequences, for example, shortages and surpluses

· examples of where problems and benefits have occurred, or might occur

· synthesis or evaluation.

Evaluation may include: the consequences in terms of shortages/surpluses, resource allocation, welfare effects, parallel markets and the effects on different stakeholders; the short-run and long-run implications; a judgment regarding the relative significance of problems and benefits.



[15 marks]

Section 1.4 – Market Failure

2000MS

(a) Carefully distinguish between merit goods and public goods, illustrating your answer with examples.

Key features of merit goods are:

· can be provided through the market but not in sufficient quantities because of: positive externalities / income distribution problems/ information / foresight problems.

· Non-excludability and non-rivalry are the key features of public goods (unlikely to be provided through the market)

[12 marks]

(b) To what extent is it desirable that the government should provide merit goods and public goods?

Possible areas for discussion include:

· government provision of merit goods on grounds of positive externalities and underprovision at the free market price

· income distribution and lack of effective demand

· lack of present and future information

· danger of private monopoly power arising

· market provision of merit goods on grounds of government failure

· general arguments for market provision in terms of competition, profit motive, costs, prices, efficiency and consumer choice

· alternatives to government provision and the free market such as subsidies, maximum prices etc.

· arguments for state provision of public goods in terms of unlikelihood of market provision / the free-rider problem / optimal resource allocation.

Mark part (b) as a whole. An unbalanced answer in terms of coverage of both public and merit goods can still enter the higher mark bands if at least one area is of sufficient quality.

[13 marks]

2002NS

(a) What are positive externalities and how do they arise? Illustrate your answer with examples.

[10 marks]

(b) To what extent should government attempt to influence markets where positive externalities exist?

[15 marks]

2003NS

(a) Why do markets sometimes fail to set socially acceptable prices?

Among the factors responses are expected to consider are:

· the presence of externalities, especially negative externalities, which lead to overconsumption at undesirably low prices. Better responses will illustrate this with a diagram illustrating equilibrium at prices and quantities lower and greater than is socially desirable.

· the difficulty of providing merit goods through free markets: these would be underconsumed because of higher-than-desirable market price, though not all societies or people would agree on what should be considered a merit good.

· the abuse of monopoly power. Monopoly power gives the firm greater sovereignty leading to a deadweight loss of output at higher price and lower efficiency. Again, good responses might be expected to draw a diagram illustrating this.

· less important points (because the question is wider than plain market failure) might include difficulties that markets themselves experience in finding equilibrium or market clearing price due to time-lags, supply inelasticities, etc.

· the distorting influence of government intervention through taxes and subsidies, etc.

[12 marks]

(b) To what extent can governments overcome this form of market failure? Illustrate your answer with examples.

To some extent the answer to (b) will depend on what has been written in response to (a). Bearing in mind this is a Standard Level question, responses might include:

· the use of taxes and subsidies to adjust levels of price and output into line with social costs. Better responses will again illustrate this with a diagram. Examples might be drawn from goods with consumption externalities such as cigarettes, or environmental externalities such as petrol.

· tradable permits. Explain

section 1 – introduction to economics · web viewib economics revision semester 1 pa per 1 e...

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